Your client has sued you for the loss that he suffered due to paying too much for the business, could you be liable?

You have a client you wants you to advise her on the purchase of a business, in regard to what a fair price would be. The client is relying on your advice as an CPA who has the knowledge to provide this type of advice. The client brings you the information from the seller of the business about what it should be worth.

The seller hired Willamette a professional whose business it is to appraise businesses that are for sale and establish a fair value. Willamette chose three methods — historical price-earnings multiple, historical price-cash flow multiple, and projected earnings and cash flow multiple. In the case of the historical earnings calculations, Willamette multiplied the Company’s 2015 earnings per share by the average price-earnings multiple of 11 “comparable” publicly traded firms. Willamette then multiplied the Company’s average earnings per share for 3 years, 2012-2014, by the average multiple the comparable firms were trading at over their 2012-2014 average earnings. Willamette weighted these values (70 percent 2015 earnings, 30 percent 2012-2-14 earnings) to come up with a weighted average. To these numbers the value of the physical assets were added (furniture/fixture, equipment, etc.), to come up with a fair price for the business.

You know who Willamette is and that he has a good reputation, so you decide to rely on this information and advise your client that what Willamette came up with seems to be a fair price.

After your client purchases the business, the client discovers that the price was much more than market value. The facts will show that there had been two very recent definitive offers for the company that were much lower than what you paid. Those offerors had developed well-informed opinions on the value of the Company.

Your client has sued you for the loss that he suffered due to paying too much for the business, could you be liable? Use the correct rule of law and do a complete analysis.